Despite mergers and acquisitions, the industry is still plagued by overcapacity, and cost for new entrants is low.
The mergers and acquisitions the container shipping industry has experienced throughout the past year will assist carriers on their path to becoming profitable, but conditions will still not be ideal for making large sums until overcapacity is dealt with and the barriers to entry rise to deter competition, according to London-Based shipping research and consulting firm Drewry.
2016 has been a notable year for the container shipping industry, with CMA CGM’s acquisition of APL; COSCO and China Shipping merging; the announced acquisitions of United Arab Shipping Co. by Hapag-Lloyd, and Hamburg Süd by Maersk Line; Hanjin filing for bankruptcy; and Japan’s three major carriers – NYK, MOL and “K” Line – announcing plans to combine their container operations.
Overall, carriers lost more than $3.5 billion in the first three quarters of 2016.
“With fewer global carriers and a break from ordering big new ships, the industry has been busy preparing the ground that could see the industry return to profitability after a long wait,” Drewry said in the last issue of its Container Insight Weekly. “There does seem to be a very high probability that better times are just around the corner, and potentially really good times when the current orderbook is delivered.”
However, Drewry said it “remains cautious on a general principal because carriers have a self-sabotaging streak that in the past has shortened booms and lengthened busts; and secondly, just because it now looks like a few big carriers will have the run of the place to themselves, it does not mean that new competition won’t rise out of nowhere.”
Lars Jensen, the chief executive officer of SeaIntelligence Consulting, is predicting “more turmoil and volatility” for container shipping in 2017. Jensen said the industry is in the midst of a major fundamental transformation process, which began several years ago, and he projects it will last at least five more years.
“In terms of global supply and demand, 2017 starts out no differently than 2016,” he said in a 2017 forecast for the liner industry, which was posted on LinkedIn. “Thanks to scrapping, supply and demand growth in 2016 in essence balances. But given the abysmal start to 2016, this does not point to a strong start to 2017.
“In the short term, the lingering effects of the Hanjin collapse and the associated ‘flight to safety’ from some shippers might underpin rates, but this does not sustainably change the supply/demand dynamics,” Jensen said. In addition, he noted the industry needs record-high scrappings in 2017 to avoid further overcapacity.
Jensen said it is plausible, however, that rate levels at the beginning of 2017 may “show market improvements” over rates in early 2016, which hit “absurdly low levels.”
The consolidation from three to four container shipping alliances could lead to a price war by members of the Ocean Alliance and THE Alliance when they commence operations next April, Jensen pointed out.
The Ocean Alliance will include the combined CMA CGM and APL, the combined COSCO and China Shipping, Evergreen Line and OOCL; THE Alliance will consist of the combined Hapag-Lloyd and UASC, Yang Ming, and the three Japanese carriers – NYK, MOL and “K” Line. Meanwhile, the 2M Alliance of Maersk Line and MSC will remain relatively unchanged, though they have entered into a deal with Hyundai Merchant Marine, which they said is outside the scope of the alliance.
Both Jensen and Drewry noted how the low price of second-hand ships and chartered ships could result in new entrants in the liner business or stoke the ambitions of smaller companies. Korea Line, a bulk ship operator carrier, has already purchased some assets from now-insolvent Hanjin Shipping and is planning to enter the transpacific market. In addition, the Islamic Republic of Iran Shipping Line (IRISL) has announced plans to buy four 14,500-TEU ships, and Drewry noted that HMM has apparently set an ambitious target for 5 percent of global capacity by 2021, which would require a serious ordering spree or takeover.
Cloudy crystal ball for container shipping in 2017
